State Local Fiscal Relations

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State Local Fiscal Relations

• Dr V N Alok
• Indian Institute of Public Administration
• 4 December 2006 vnalok_at_gmail.com

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The federal ensemble in India comprises

• Union Government
• Twenty Eight States
• Two UTs with legislatures
• Five Other UTs
• Rural local bodies
• Urban local bodies

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Institutions

• Finance Commission
• Planning Commission
• National Development Council
• Inter State Council
• Centrally Sponsored Schemes
• State Finance Commission

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Principle of Subsidiarity

• Whatever can be done best at the lower level
  must necessarily be done at that level. Only that
  which cannot be effectively implemented at a
  lower tier might be taken to a higher tier

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74th Constitutional Amendment

• Addition of Part IX A
• 12th Schedule (243 W)
• Powers to ULBs (243 X)
• Metropolitan Planning Committees
• District Planning Committees
• State Election Commission
• Finance Commission of States (243 Y)
• Audit of Accounts of Municipalities

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12th Schedule(243W)

• Core functions
• Roads and Bridges
• Water supply for domestic, industrial and
  commercial purpose
• Public health, sanitation, conservancy and solid
  waste management
• Burial and cremation grounds and electric
  crematoria
• Public amenities including street lighting,
  parking lots, bus stops and public conveniences
• Welfare functions
• Safeguarding the interests of weaker sections of
  society, including the handicapped.
• Slum improvement and up gradation
• Urban poverty alleviation
• Provision of urban amenities and facilities such
  as parks gardens, playgrounds
• Promotion of cultural, educational and aesthetic
  aspects
• Cattle pounds prevention of cruelty to animals
• Development functions
• Urban planning including town planning
• Regulation of land-use and construction of
  buildings
• Planning for economic and social development
• Fire services
• Urban forestry, protection of the environment and
  promotion of ecological aspects

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Legislations in other countries

• Albania 1992 Law 7572 on the Organization
  and Operation of Local Government
• . Bangladesh The Pourashava (Municipalitie
  s)
• Ordinance, 1977.
• Bulgaria 1991 Law on Local Self- Government
  and Local Administration.
• Hungary Law 65 of 1990 on Local
  self-Government.
• Republic of Korea The Local Antonomy Act, 1988.
• Phillipines The Local Govt. Code, 1991
• Sri Lanka The Thirteenth Amendment to the
  Constitution.

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Reasons to cheer

• Mandatory Provisions of Part IX and IX A
• Conformity Acts have been enacted in all the
  States
• Elections have been conducted in almost all
  States
• All States except six have received their first
  generation Finance Commissions reports
• About a million women have been elected

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Areas of concern

• Recommendatory Provisions of Part IX
• ULBs in states starved of funds
• But expanded responsibilities
• Lack of capacity
• Institutional
• Personnel

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Own Source Revenue of Each Level of Government (
Share)
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Own Source Revenue of Each Level of Government (
Share)
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Expenditure by Local Bodies

• Rural local bodies 0.98 of GDP
• Urban local bodies- 0.56 of GDP

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Municipal Spending

• 3.0 to 3.5 of combined spending
• 0.6 to 0.7 of GDP of all States
• 35 to 40 lower than the norms

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Revenue source of Municipalities

• Internal Sources
• Taxes
• Non- Taxes
• External Sources
• Borrowings
• Fiscal Transfers- Revenue Sharing, Grants

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Internal revenues of Municipalities

• Direct Tax revenue
• Property tax
• Duty on Transfer of Property
• Property related service taxes- water tax,
  drainage tax, conservancy tax, lighting tax, fire
  tax etc
• Profession tax
• Advertisement tax
• Entertainment tax
• Environment tax
• Passenger and goods tax
• Tax on vehicles
• Tax/toll on animals
• Boat tax
• Pilgrim tax
• Timber tax
• Indirect Tax
• - Octroi

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Own revenues of Municipalities

• Non-tax revenue
• Parking fees
• Market fees
• Toll on bridges / vehicles
• Fee for fire services
• Water rate

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Contribution of Own Revenue in Total Expenditure
of PRIs
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State Finance Commission

• Recommendations can be grouped into
• Global sharing of revenue from state to local
• Assignment of taxes to local bodies
• Grants-in-aid from state to local bodies
• Others

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Global share by SFCs

• State Acceptance
• Total Revenue of state
• Andhra Pradesh (I) 39.2 No
• Andhra Pradesh (II) 10.4 No
• Assam 2.0 Yes
• Goa 36.0 No
• Own Revenue of State
• JK (I) 13.5 No
• M.P. (I) 11.6 Modified
• Own Tax revenue
• Kerala (II) 3.5 Not known
• Rajasthan (I) 2.18 Yes
• Rajasthan (II) 2.25 Yes
• T.N. 8.0 Yes
• U.P. (I) 10.0 Yes
• U.P. (II) 12.5 Yes
• W.B. 16.0 Yes

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Amendment in Article 280

• 280 (3)(bb) recommend measures needed to augment
  the Consolidated Fund of a State to supplement
  the resources of the Panchayats and
  Municipalities in the State
• 280 (3)(c) recommendations to be based on the
  recommendations made by the Finance Commission of
  the State

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10th Finance Commission(1995-00)

• No mandate in its ToR for local bodies
• Sue Moto Cognizance of the Amendments
• Rs 4381cr for panchayats _at_ Rs 100 per capita
• Rs 1000 cr for Municipalities
• Distribution based on inter State slum population

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11th Finance Commission (2000-05)

• Rs 8000 crore for panchayats
• Rs 2000 crore for municipalities
• Accounts, data base and audit be the first charge
• Remaining amounts for the core services
• Article 280 (3)(C) be deleted

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EFC cited four reasons

• (i) Non-synchronization of the period of the
  recommendations of the SFCs and the Central
  Finance Commission
• (ii) Lack of clarity in respect of the
  assignment of powers, authority and
  responsibilities of municipalities
• (iii) Absence of a time frame within which the
  state governments are required to take action on
  the recommendations of the SFCs
• (iv) Non-availability of the reports of the SFCs.
  

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EFC criteria for allocation

• Criteria Weight
• population, 1991 40
• geographical area 1991 10
• Revenue effort of local bodies 10
• Distance 20
• Index of decentralization 20

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Index of Decentralization

• Enactment of state municipal legislation in
  conformity with the Constitution (seventy-fourth)
  Amendment Act, 1992.
• Intervention/restriction in the functioning of
  municipalities.
• De-jure assignment of functions to municipalities
  vis-à-vis the twelfth schedule of the
  Constitution of India.
• De-facto assignment of functions to
  municipalities by way of rules, notifications,
  and orders of state government.
• De-jure assignment of taxation powers to
  municipalities.
• Exercise of taxation powers by municipalities.
• Constitution of the finance commission of states
  and submission of action taken repots.
• Action taken on the major recommendations of the
  finance commission of states.
• Election to the municipalities.
• Constitution of district planning committees.

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12th Finance Commission (2005-10)

• Sequentially the third Finance Commission
• ToR consolidated reproduction of 280 (3)(bb)(c)
• SFC must identify issues for Union Government
• Approach- Equalization of basic services
• Rs 20000 cr to panchayats for drinking water
  supply, sanitation
• Rs 5000 crore to municipalities for solid waste
  mgt

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Inter se Allocation
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Grants by 3 FCs (Rs crore)
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Issues

• Grants to go up- No matching contribution
• Releases in May and November
• State to make allocation
• Most SFC Reports are silent
• Monitoring by State for utilization of funds
• Monitoring at Central level for compliance

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Thank You!